Prediction Hit and other observations

For those who have seen my market updates will remember that my one prediction for this year was that we would see another 500 point day in the market which was something we had not seen since 1987. I almost had the prediction met in January of this year as the futures were down over 500 but the Dow in regular trading never met that level. The reason for the prediction was that the level volatility in the markets had come off historical lows and was now progressing to higher levels which is a normal cycle as expressed by the old adage "High volatility begets low volatility and vice versa."  Of course the level in 1987 represented over 20% where as today it is under 5% however the psychological implications are interesting in their timing.

Unfortunately, I am only half right in my prediction as I said we would also have a 500 point up day as well.  Still have some time and the historically strongest season is still in front of us... but I am not holding my breath.

MER & BOA Observations:

The spread between the announced deal with ML and BOA is very interesting. The spread currently as I write this is around $3.50 with a high of around $5.00. Usually that size spread is quickly Arbed away so it makes me wonder if liquidity is that scare and tight or does the market think that deal may not go through as currently priced?

Click the link below for Goldman's take on the merger. While its nice that they took ML off their sell list they did at least acknowledge ML as the preeminent wealth management franchise.

Goldman Sachs Research Piece

Financials in general:

I think we are getting close to the lows in financials but I don't think we are just there yet. While we have seen some selling I would not call it capitulation as the levels of activity and volume did not seem to evoke enough fear or turnover. 

Municipal Observations:

With the consolidation of one major player and the liquidation of another major player in the muni market spreads and bids will more than likely widen to customers. If you thought bonds were hard to come by before I am guessing it will only get worse with less liquidity. Muni's do appear very attractive and still seem to offer some of the best risk/reward ratios but the near term may still be volatile. The market has begun to price in a move down in rates by the Fed and add that to potentially higher tax rates makes muni's pretty compelling.


 (copyright 2008, duke dot jones at gmail dot com)